Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics. I am part of the Austrian School of Economics, and I critique Krugman's writings from that perspective.

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Tuesday, September 28, 2010

Every(Krug)man

Paul Krugman is a bit upset that someone could accuse him of being a "warmonger," since he claims that World War II ended the Great Depression. Now, having spoken personally to Krugman about his opposition to the U.S. war in Iraq (and I share that opposition and told him so), I don't think Krugman loves war.

Nonetheless, his view is problematic, especially when one compares his views to those of economist Robert Higgs, who in this essay clearly debunked the "World War II as the end of the Depression" nonsense. Nonetheless, Krugman counters that the amoral nature of economics allows for war to be a positive catalyst in ending a downturn, even if we are against the war itself.

Economics, he writes, "is not a morality play." That is true, at least at one level. Ludwig von Mises himself wrote that economics is a "value-free" science, but he was writing from a very different perspective.

Krugman's contention is this:

...economics is not a morality play. It’s not a happy story in which virtue is rewarded and vice punished. The market economy is a system for organizing activity — a pretty good system most of the time, though not always — with no special moral significance. The rich don’t necessarily deserve their wealth, and the poor certainly don’t deserve their poverty; nonetheless, we accept a system with considerable inequality because systems without any inequality don’t work. And before the trolls jump in to say aha, Krugman concedes the truth of supply-side economics, that’s not an argument against progressive taxation and the welfare state; it’s just an argument that says that there are limits. Cuba doesn’t work; Sweden works pretty well.

(Now, I would suspect that Krugman would not be able to explain why Cuba "doesn't work," given he thinks that the two greatest critics of socialism of the 20th Century, F.A. Hayek and Mises, were idiots and people of no insight. He probably would mumble something about "incentives," but I doubt Krugman would even be able to comprehend the "economic calculation" issue that Mises and Hayek developed.)

Krugman goes on:

And when we’re experiencing depression economics, by which I mean a situation in which it’s hard to create sufficient demand to achieve full employment — mainly because short-term interest rates are up against the zero lower bound — the essentially amoral nature of economics becomes even more acute. As I’ve said repeatedly, this is a situation in which virtue becomes vice and prudence is folly; what we need above all is for someone to spend more, even if the spending isn’t particularly wise. (Emphasis mine)

It is interesting that he uses such phrasing, given it comes almost word for word from Bernard Mandeville's "Fable of the Bees," which was written in 1705, and which I lampooned in this piece, "The Fable of the Krugman."

Keep in mind, however, that Krugman's turning of the "virtue" of saving upside down to embrace the "vice" of reckless spending is not what Mises meant by describing economics as "value-free." Krugman is just saying that while saving would seem to be a good thing, what is needed now is spending, and lots of it. Thus, "situational ethics" becomes the basis for economic analysis.

However, the problem is not in our interpretation of economic morality. The problem is that Krugman insists that massive spending on behalf of the state will magically transform the U.S. economy, give it "traction," and send us on the Yellow Brick Road to Prosperity if not Oz itself.

Krugman does not embrace war; he embraces the government spending, the planned economy, the interventions, and the intrusions of the state into economic decisions. To him, that is Oz. However, if one reads the Higgs piece, one gets a much better understanding of the "prosperity" that war can bring.

For that matter, the Great Depression did not linger on because of a lack of government spending; as Higgs points out, it was "regime uncertainty," and I will put my money on that every time.

Ironically, while Krugman might not see himself as "Everyman," nonetheless his columns are full of condemnation for those people who might disagree with him or (horrors) vote differently than he does. So, even if the economy might not be a morality play, his columns tell a different story.

8 comments:

Bob Roddis
said...

Krugman and the Keynesians are toast.

Krugman admits that there really is no historical evidence that Keynesianism has ever worked:

Now, you might ask why we’re still looking at 70-year-old data on this subject. The answer is that periods of war or preparation for war are, in practice, the only really clear-cut cases we have of big increases in government spending in the face of a depressed economy.

Here he admits that he’s basically just a dreaded “liquidationist” and gives an essentially Austrian explanation of how WWII ended the depression:

So what will happen? In the end, I’d argue, what must happen is an effective default on a significant part of debt, one way or another. The default could be implicit, via a period of moderate inflation that reduces the real burden of debt; that’s how World War II cured the depression. Or, if not, we could see a gradual, painful process of individual defaults and bankruptcies, which ends up reducing overall debt.

And that’s what is happening now: as this story in today’s Times points out, the main force behind the gratifying decline in consumer debt appears to be default rather than thrift.

Thus, we can liquidate via open defaults and bankruptcy, or through surreptitious subterfuge, fraud and theft via fiat money dilution.

And when we’re experiencing depression economics, by which I mean a situation in which it’s hard to create sufficient demand to achieve full employment — mainly because short-term interest rates are up against the zero lower bound — the essentially amoral nature of economics becomes even more acute.

This is precisely where Krugman admits to an underlying belief in Austrian economics: Explaining why "pump-priming" wokrs only in certain situations, even relying on the interest rate as an influence, needs to appeal to the structure of production.

When there is a robust well-invested economy, additional spending by a government - with at least one stage of malinvested resources (having to go through the gov't bureaucracy has costs) - will still flow into productive sectors. This, of course, is represented on the market as a positive interest rate, because invested money still have productive returns in the "good" sections of the economy.

If the economy's resources are mal-invested, however, we get into Krugman's "depression economics". But instead of needed some patchwork theory that applies only in certain situations, Austrians can apply their same theory to explain why pump priming isn't working. As the interest rate has been driven down, and unsustainable investments have risen, there is simply less actual return on invested resources, especially when the expenditures of gov't are to primarily failing institutions.

Krugman looks to the interest rate as his "trigger" as to which set of economics to use (note that he still has the same prescription in either case, just the degree changes - spend, or spend more), and he is using the interest rate an independent variable in his blessed equations. In reality, the interest rate is tied directly to how capital structure is put to use, giving rise to real conditions where money creation or deficit spending by the central bank can either be absorbed into genuine profitable businesses if only these businesses are operating, or be in a chase after bad, negative return investments if these have been allowed to survive in an economy with below market rates or direct subsidy.

The answer to "Depression economics" should be evident, even obvious, to someone who blames low interest rates - let the interest rates rise (preferably freely on the market). Even if the excuse is just so gov't spending can gain traction, it's an admission that (artificially) low interest rates harm the real returns from the economy, which can only be explained with the ABCT.

You say that a Princeton and MIT graduate who has developed important trade theories would not be able to understand what Mises and Hayek developed, just because you disagree on economics with Krugman- what a shame. You could never understand the New Trade Theory that Krugman developed which he won the NOBEL PRIZE FOR!!!!!!! What contributions to economics have you made? None, of course. Thats why you teach at Frostburg State or whatever its called. Hey, if you want to talk about Krugman not understanding economics just because he's a big government guy, I can sink to your low dialogue level too.

Certainly it was the stimulus imparted to the economy by full employment that drove the economy into overdrive and set it up for record post-WWII growth under Keynesian management.But you did NOT need war to effect such stimulus: you could have given a huge Keynesian boost to the economy by large infrastructure spending, social spending, education spending, giving all Americans a national health care system, Keynesian tax cuts etc, with the SAME functional effect but with useful things to show for it.

And don’t tell me that Roosevelt “tried stimulus and it failed” and all that nonsense, because, as is well known, US GDP recovered rapidly under Roosevelt and unemployment came down from 24.9% to 14.3% before Roosevelt balanced the budget in 1937 with disastrous effects. The real trouble with Roosevelt was that he was just too timid:

About Me

I teach economics at Frostburg State University in Frostburg, Maryland. We are located on the Allegheny Plateau, and we have cool summers and tough winters.
I am the single father of five children, four of them adopted from overseas and I have two grandchildren. My family and I are members of Faith Presbyterian Church (PCA).